Wednesday, April 15, 2009

FIRESIDE CHAT: Health Care Reform (b)


When a private-pay system encounters public policy, a fundamental conflict of interests rears its ugly head. The public has a justified interest in coverage for illnesses that cost big bucks to treat, whereas profit-motivated insurance companies have an equally justified interest in minimizing expenses for such illnesses. AIDS, as a significant example, is expensive and getting more expensive as a result of increased longevity and concomitant treatment time. So, if an insurance company learns that you are infected with HIV, the microbial cause of AIDS, it assigns you to a high-risk category and may deny coverage, or charges you more for coverage because you have a ‘pre-existing condition’. I termed this policy “equally justified,” not because it is right or best for the nation, but because it reduces healthcare premiums for individuals in low-risk groups generally, and the pursuit of profit is intrinsic to our capitalist system.

The overall cost of healthcare at any specified level is externalized, not reduced, under such a system. If public policy demands coverage for individuals known to be afflicted with diseases that are relatively expensive to treat, then the cost is born by the taxpayer. That is, the taxpayer subsidizes insurers who exclude high-risk groups from among their clientele. Ultimately, low-risk groups benefit from private insurance because premiums are lower, and high-risk diseases, while having a lower than average incidence in the group, still are covered if they occur. These groups, therefore, have an interest in preserving private-pay/private-insurance models.

In light of the above, the fundamental conflict of interest between private vs. public healthcare financing models is seen to reside in the economic cost of distributing risk among everyone vs. carving out low-risk groups who pay less privately and high-risk groups that taxpayers must underwrite. One complication is, of course, that individuals subscribing to private insurance, or paying for healthcare privately (‘self-insuring’), also pay taxes for public insurance such as Medicare and Medicaid, even though they don’t use them, or use them less. This complication can and should be accounted for in detailed economic models of healthcare financing, but is difficult to quantify in general because private medical treatment is subsidized by from public funding to a variable degree under different models. Most notably, our tax system provides a standard deduction (also variable) for medical treatment and, if you self-insure or subscribe to private insurance, you may itemize and receive an even higher deduction than the standard deduction from your taxable income, which would be diminished on your tax return by all or some fraction of the amount that you paid for medical care.

Besides egalitarian risk-sharing vs. profit-motivated risk-minimizing, a second fundamental issue must be considered in public policy on healthcare financing: the cost of government bureaucracy vs. the cost of private bureaucracy.


Copyright © 2009 by The Center for Health Risk Assessment and Management, a Division of RAM TRAC Corporation